How to Save Tax on Gifts?

What is a Gift Tax?

A gift tax is charged when one person gives property to another without getting anything of equal value in return. This property can include money, real estate, or other assets.

The goal of the gift tax is to stop people from avoiding estate taxes by giving away their assets before they die. It also helps prevent the concentration of wealth in a few hands.

In India, the Income Tax Act, 1961 itself does not directly impose a gift tax. However, it does consider certain gifts as income taxable in the hands of the recipient.

What is the Tax on Gifts?

• Any gifts exceeding Rs. 50,000 in a year from someone other than close relatives are added to your income and taxed at your income tax slab rate.

• Even gifts below Rs. 50,000 from non-relatives are clubbed together if the total value exceeds Rs. 50,000, making the entire amount taxable.

Income Tax Calculator

An income tax calculator helps you to estimate your income tax liability based on your earnings and deductions. It calculates the amount of tax owed to the government. You can also calculate the tax payable on gifts given to others by following specific guidelines provided by the income tax authorities.

Provisions for Gift Taxation in India

*Stamp Duty Value is the value assigned by the government for tax purposes.
**Fair Market Value (FMV) is the estimated price a willing buyer would pay to a willing seller in an open market.

Illustration of Gift Tax on Land/ Building/ Valuables Sold Below Value

Immovable property for inadequate consideration/ sale value:

• Stamp duty value: ₹2,00,000

• Consideration: ₹75,000

• Taxable amount: ₹1.25 lakh (stamp duty value exceeds consideration by > ₹50,000)

Same property with different considerations:

• Consideration: ₹1,60,000

• Taxable amount: Nil (stamp duty value does not exceed consideration by > ₹50,000)

Note: The value adopted by the stamp duty authority is used for the purpose of calculating stamp duty.

Tax Exemption on Gifts

This table shows who is exempt from paying gift tax in India, depending on who gave the gift (donor) and who received it (donee).

Note: Even though some gifts are exempt for the recipient, the donor might still have to pay taxes on the income used to purchase the gift under certain circumstances.

How to Save Tax with Gifts?

• Transfer to family for investment: Consider giving funds to parents or spouses who might be in a lower tax bracket. The income earned on those investment options would then be taxed at their lower rate. This works well, especially for senior citizens who have higher tax-exemption limits.

• Gifts to dependent relatives:  If you have dependents like parents or siblings with minimal to no income, gifting them money for investments could be beneficial. The income generated wouldn't be clubbed with your taxable income.

• Loans vs. Gifts: Consider a loan instead of a gift if the recipient has the ability to repay. This way, you avoid any gift tax implications.

• House Rent Allowance (HRA): If you live in a house owned by your parents and pay them rent, you may be able to claim an HRA exemption on your taxes.

Important Points to Remember:

• The tax is calculated on the receiver's income, not the giver's.

• There's a concept of "clubbing", where certain income from close relatives is added to your income for tax purposes. This is to prevent the misuse of gifting for tax evasion.

Key Points to Remember for Saving Tax on Gifts

Here's a simplified, crisp, and different version of the information in bullet points:

• Gifts between relatives are exempt: This applies to parents, spouses, siblings, grandparents, children, and their spouses. You can gift any amount to them without worrying about tax.

• Gifts below Rs. 50,000 are exempt: If the giver and receiver are not relatives, gifts up to Rs. 50,000 in a year are tax-free.  However, if it exceeds this limit, the entire amount becomes taxable for the receiver.

• Clubbing provisions: 'Clubbing' is important to understand for tax-saving through gifts. A common misconception is that gifts to a spouse or minor child are automatically tax-exempt, but clubbing provisions may apply, making the income taxable for the donor.

Example of 'Clubbing'

• If you have an annual income of ₹10 lakhs and gift ₹1 lakh to your wife, your taxable income remains ₹10 lakhs, not ₹9 lakhs.

• The ₹1 lakh gift is not taxable for your wife. However, if she invests it (e.g., in a bank FD), the interest earned is considered taxable income.

• This rule also applies if the gift is given to a minor child.

In Conclusion

To save tax on gift money, it's essential to understand and utilize the exemptions provided under the Income Tax Act. Gifts received from specified relatives or as part of certain occasions are generally exempt from tax. Proper documentation and adherence to legal guidelines are crucial to ensure compliance and maximize tax savings on gift money.